ERC-404

Why Trust Techopedia

What is ERC-404?

ERC-404 is an experimental token standard on the Ethereum blockchain that aims to converge fungible (ERC-20) and non-fungible tokens (ERC-721). The standard introduces a hybrid model that allows a token to show properties of fungibility and non-fungibility.

Advertisements

One of the main features of ERC-404 is its mint-and-burn mechanism, which enables non-fungible tokens (NFTs) to be divided into smaller, tradable pieces without losing their unique attributes. This mechanism is designed to make access to high-value NFTs easier, potentially bringing them to a broader audience.

Despite its unique approach, ERC-404 has not yet gone through the formal Ethereum Improvement Proposal (EIP) process. This is why the standard needs further development and security auditing.

What is ERC-404?

Key Takeaways

  • ERC-404 introduces semi-fungible tokens on the Ethereum blockchain.
  • The mint-and-burn mechanism of ERC-404 allows for the fractionalization of NFTs.
  • ERC-404 remains an experimental standard that has yet to undergo the formal EIP process.
  • The standard has the potential to democratize access to NFTs and integrate with decentralized finance (DeFi) protocols.
  • However, ERC-404 faces potential security issues, which it needs to address first.

The Origin of ERC-404 Tokens

Pandora was the first project to implement this new standard, leading to the growing recognition of ERC-404.

Launched on February 5, 2024, Pandora proved that ERC-404 tokens can allow high-value NFTs to be divided into smaller, more tradable pieces. This approach attracted notable attention and led to the rapid growth of the Pandora token, which also impacted the popularity of the ERC-404 standard.

Development of ERC-404

Pseudonymous creators “ctrl” and “Acme” spearheaded the development of ERC-404. They designed this token standard to combine the properties of fungible ERC-20 tokens and non-fungible ERC-721 tokens into a hybrid format.

Since the development of ERC-404 is not yet complete, the team is working to optimize gas efficiency and reduce transaction costs associated with its minting and burning. They are also preparing to submit an EIP to officially launch the standard within the Ethereum ecosystem.

How ERC-404 Works

How ERC-404 Works

The main mechanism behind ERC-404 is its mint-and-burn process, which allows for the fractionalization of NFTs. In simple terms, when an NFT is fractionalized, it is “burned” and replaced by multiple smaller fungible tokens, which represent fractional ownership.

On the other hand, when these fungible tokens are collected, they can be “minted” back into a whole NFT. This process enhances the liquidity and tradability of expensive NFTs by enabling them to be bought and sold in cheaper fractions​.

Key Features of ERC-404 Token Standard

The ERC-404 token standard has some defining features that distinguish it from other Ethereum token standards:

Semi-fungibility
ERC-404 tokens blend the properties of fungible ERC-20 tokens and non-fungible ERC-721 tokens.

Mint-and-Burn mechanism
At the core of ERC-404 is the mint-and-burn process.

Enhanced liquidity
The standard aims to address one of the challenges of liquidity in the NFT market by enabling fractional ownership.

ERC-404 Use Cases

Here are some key uses:

Fractional ownership of NFTs
One of the common use cases of ERC-404 tokens is facilitating fractional ownership of high-value NFTs.

Removing Trust Issues
ERC-404 addresses trust issues by using a decentralized smart contract that directly links the NFT to the token’s value.

Integration with DeFi protocols
ERC-404 tokens can be integrated into DeFi protocols, expanding the range of financial activities.

Examples of ERC-404 Projects

Here are some examples of projects utilizing the ERC-404 token standard:

Pandora

Pandora was the first project to implement the ERC-404 token standard. It allows users to fractionalize high-value NFTs and trade these fractions on various platforms. Pandora’s launch was pivotal for ERC-404, as it proved its potential to improve liquidity and accessibility in the NFT market.

DeFrogs

DeFrogs is another prominent project using the ERC-404 standard. It features a collection of 10,000 frog-themed profile picture (PFP) NFTs that can be fractionalized and traded. DeFrogs has benefited from the liquidity provision of ERC-404, using the standard to allow fractions of its NFTs to be traded on platforms like Uniswap and OpenSea.

EtherRock404

EtherRock404 is a derivative collection of the original EtherRock NFTs developed according to the ERC-404 standard. The project uses the mint-and-burn approach to manage the fractionalization of its NFTs. For every whole EtherRock404 token purchased, a new EtherRock404 NFT is minted.

Rug

Originally an NFT collection on the Solana blockchain, Rug was adopted by a group of developers who implemented the ERC-404 token model. The project features pixelated penguin NFTs and benefits from fractional ownership and enhanced liquidity provided by the ERC-404 standard.

ERC-404 Pros and Cons

Like any other token standard, ERC-404 comes with its own unique upsides and downsides.

Pros

  • ERC-404 can enhance the liquidity of NFTs by allowing them to be traded as fungible tokens on decentralized exchanges (DEXs)
  • The standard allows NFTs to be fractionally owned, which lowers the barrier to entry
  • ERC-404 tokens can interact with a wide range of protocols and platforms, broadening their utility across the DeFi and NFT landscapes

Cons

  • Since ERC-404 is an experimental standard, it carries uncertainties related to security, bugs, and compatibility issues
  • The fractional ownership model may encounter regulatory hurdles in countries with strict regulations on crypto assets
  • ERC-404 faces competition from other NFT standards like ERC-998 and ERC-1155.

The Bottom Line

ERC-404, meaning a hybrid token standard on the Ethereum blockchain, combines the properties of ERC-20 and ERC-721 tokens into a single framework. The standard enables the fractional ownership and trading of NFTs, enhancing liquidity and accessibility in the digital asset market.

ERC-404 tokens have fungible and non-fungible states, which they can switch between. Despite its potential, ERC-404 is still experimental and has not yet been formally recognized or audited as an official Ethereum standard​.

FAQs

What is ERC-404 in simple terms?

What is the use case of ERC-404?

What is the difference between ERC-404 and ERC-20?

What are the benefits of ERC-404?

What problems does the ERC-404 standard solve?

Advertisements

Related Questions

Related Terms

Ruholamin Haqshanas
Cryptocurrency journalist
Ruholamin Haqshanas
Cryptocurrency journalist

Ruholamin is a crypto and financial journalist with over three years of experience. Apart from Techopedia, he has been featured in major news outlets, including Cryptonews, Investing.com, 24/7 Wall St, The Tokenist, Business2Community, and has also worked with some prominent crypto and DeFi projects.  He holds a Bachelor's degree in Mechatronics. Ruholamin enjoys reading about tech developments, writing, and nature-watching